Declining Profits in Retail Make Retailers Embrace E-Commerce

If 90s were the age of pop music and 2000s were the age of Internet, the 2010s are clearly the age of consumerism.

The driving factor has been favorable demographics – a young, working audience with rising income levels and increased brand affinities, thanks to urbanization. The effect of this is evident in the growth of the retail industry in India, which is expected to grow at a CAGR of 13% to become a USD 950 billion industry by 2018. The penetration of organized retail is growing steadily at a rate of 19-20%, which is fuelling this growth further.

So far so good right? But this story is not all bright and shiny. According to a recent RAI report, despite considerable investments, the returns from retail business are raising concerns. For the expected growth rate to be achieved, it is critical that businesses start generating positive cash flows. High operating costs and working capital, complex regulatory policies and inefficiencies in supply chain are costing retail businesses heavily.

Let’s stop for a second and compare this scenario with that of Online retail. Over the last 5 years, India’s e-commerce market size has been growing at a CAGR of over 56%, which almost 4 times as much as the overall retail industry’s growth. While it might take a long while before the e-commerce companies in India actually start making profits, the increased marketing budgets and the race to be top of mind are playing to the advantage of etailers – small and large – who sell their products through various e-commerce portals.

Op Profit has halved in 3 years!

Crisil Research findings compares the deteriorating financials of physical retailers over the past 3 years with the rapid growth of its e-tail counterpart to conclude that online is the way to go, in the future. Considering that, at an aggregate level, operating and net margins of companies such as Shoppers Stop, Cantabil, Kewal Kiran, Provogue, and Trent have all shown a declining trend this might be a forecast that needs to be taken seriously.

The surge in online retailing is surely not the only reason for the weak performance of traditional retailers. Other factors such as economic slowdown and local competition also play a part in the slowdown. However, what’s irrefutable is that the online upstarts are chomping away offline business.

Prasad Koparkar, Senior Director – Industry and Customised Research in a recent interview said “Eventually, just the way it happened in the US, physical retailers will have to establish a presence online. And, with the right strategies, they can even compete effectively. For instance, to tackle the queue problem at its stores, Wal-Mart allows customers to shop online and opt for either home delivery or store pick-up. Today, Wal-Mart is among the top online retailers in the US.”

But is it as easy as it sounds? While large retailers like Basics (Hasbro clothing) have started promoting their online channels more than their offline stores and come up with innovative online ideas like Creyate (Aravind group), the small and medium retailers are facing the heat.

Can Retailers Conquer Etail?

Kumar, a mobile storeowner in Bengaluru says sales have fallen heavily over the last 2 years. “Diwali is generally the busiest time of the year for us. We sold thousands of phones in just the week leading to Diwali last year. This year, with all the latest fancy android phones being available only on flipkart and with snapdeal and amazon selling phones in dirt-cheap rates all through the month, we hardly managed to sell a few dozens. These online stores are really bad news for business.” He says. When asked why he is not trying his hand at selling his products online, Kumar confessed that he was not savvy enough to do that and did not have resources that could take it up as well. “I already have had to send away a few employees due to the falling business load. I cannot afford to pay a new computer savvy employee every month at this rate.”

Guruji, who owns Friend’s Collection, a multi-store retail chain in Goa has a different story to tell. He has been in the gifting item retail business in categories like fragrances, barware, kitchenware, and tableware for almost 13 years and has excellent knowledge of the categories. While early 2000’s saw good growth in business, it has plateau’d in the last 2-3 years. Today, his flagship store could earn more in rent, than it makes in profits. But he took a bold step and turned his focus to online.

“In our experience small & medium brick & mortar Retailers are experts in the supply side of the retail business. They have a pulse of the customer, know where to source the products, get better pricing, warehousing & logistics etc. Visual merchandize is also a strength area. But, ecommerce needs another key strength – lightening-fast information flow. The cycle of a product being procured, to it being photographed, written about, cataloged and published on multiple sites needs to be perfected. Also, information like inventory levels of products, stock-outs, price changes need to move fast through the system. This fast information flow is where we can help.”

The verdict is clearer now. Like Crisil says, physical retailers in India will have to establish their presence online quickly. And, with the right strategies, they can even compete effectively. Expert help is always available for all SMEs in the form of various ecommerce solution providers. And there has never been a better time to take the leap. After all, numbers never lie.

About the Author:

Browntape helps retailers sell online on multiple marketplaces like eBay, Amazon, Flipkart, Snapdeal, etc. marketplaces in India. They provide services and software that allow Retailers to either outsource their online selling business or manage things on their own using their innovative inventory and order management software.

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Browntape helps retailers sell online on multiple marketplaces like eBay, Amazon, Flipkart, Snapdeal, etc. marketplaces in India. They provide services and software that allow retailers to either outsource their online selling business or manage things on their own using their innovative inventory and order management software